A Loan Agreement is a written promise from a lender to loan money to someone in exchange for the borrower's promise to repay the money lent as described by the Agreement. Its primary function is to serve as written evidence of the amount of a debt and the terms under which it will be repaid, including the rate of interest (if any). The agreement serves as a legal document that is enforceable in court creating obligations on the part of both the borrower and the lender.
This document can be used to record the terms and conditions of a loan made between individuals persons or companies who are Indian residents. Loans by a foreign lender to an Indian borrower are covered by the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder and this document has not been adapted to be used for a loan by a foreign lender to an Indian company.
Whether the loan is between friends and family or is a commercial loan between two businesses for a specific purpose, options in this Loan Agreement will allow making a simple interest-free loan or adding and automatically calculating interest, setting a repayment schedule, adding guarantors and requiring the borrower to provide security for the loan.
How to use this document
This document should be read carefully by the parties and the guarantor (where applicable). The Loan Agreement will be legally binding when it has been printed on judicial stamp paper or e-stamp paper and signed by each party, and has been dated. The value of the stamp paper would depend on the state in which it is executed. Each state in India has provisions in respect of the amount of stamp duty payable on such agreements. Information regarding stamp duty payable can be found on the State government websites. For instance, the website of the state of Karnataka provides details of stamp duty payable on agreements as does the website of the Delhi.
Each Party should sign and return a physical copy of the Loan Agreement. Individuals should ensure that their signature of the document is witnessed by another adult person (over the age of 18).
Where a company is a party to this agreement they should ensure that the Loan Agreement is signed by an authorised signatory, which is usually a director.
Where the Lender has requested that the borrower provide a guarantor, such guarantor should also carefully read the entire Loan Agreement and its guarantee obligations, and sign where indicated.
Each Party should keep a signed copy of the Loan Agreement. In order to do this, two different copies can be signed (or three if there is a guarantor as well), or if only one copy is signed, it can be photocopied and then distributed between the parties.
This agreement is subject to the broad principles of contract law.
The Companies Act, 2013 regulates the giving of loans, guarantees or security by companies to their directors (whether directly or indirectly).
Banks are required to comply with directions issued by the Reserve Bank of India regarding interest rates that can be charged by them.
A loan can be secured or unsecured i.e. the borrower can provide the lender with a security towards repayment of the loan. In the event of failure by the borrower to repay the loan amount, the lender can invoke the security and use it to recover its money. There are some additional documents to be executed and additional laws which are applicable in case the loan is a secured loan which are briefly described hereunder:
Laws applicable in respect of security provided towards loan
1. Land and other immovable property - There are some additional formalities to be complied with if the loan is secured by charge over a property i.e. in case of a default in repayment of loan the lender would be entitled to sell the property and recover the loan amount, interest and other amounts payable by borrower.
Security over real assets i.e. immovable property is created by way of mortgage. Under the Transfer of Property Act, a mortgage (other than an equitable mortgage) for repayment of more than INR100 must be by way of a registered instrument (indenture of mortgage). A mortgage of immovable property (other than equitable mortgage) must be registered within a period of 4 months under the Registration Act, 1908. Certain security interest must also be registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). In some cases, a prior permission is required to be obtained from the Income tax authorities for creation of charge on immovable properties.
In an equitable mortgage, a declaration is made at the time of deposit of title deeds. That deposit is also recorded by the mortgagee by way of a memorandum of entry.
2. Movable property such as assets, machinery etc. - Security over movable property can be created by way of hypothecation and execution of a deed of hypothecation.
3. Pledge over shares and other movable assets - Another type of security which is often provided is creation of charge on financial instruments such as shares of a company which would require compliance with the provisions of the Companies Act, 2013. Section 172 of the Contract Act 1872 provides for a pledge over tangible movable assets as a bailment of goods as security for payment of any outstanding debt.
In case of charge being created by a company over property or instruments such as its shares, filing must be made with the Registrar of Companies, regarding the creation of charge.
It may be noted here that in India, there are laws which regulate money lending and a person/entity in the business of making loans would need to be registered as a moneylender or with the Reserve Bank of India as a banking company or a non banking financial company.
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